We saw last WSW that volatility was going “way low” in anticipation of “things to come”.
Tomorrow the European Central Bank ECB is releasing information about participation in the latest round of the LTRO Long Term Refinance Operations, which is what they call the process of soaking the German Taxpayer (and any other fools they can find) to pay for the Greek Socialism excesses.
The “News Flow” is that a $750 Billion participation will be the pivot point. If less than that many Greek bonds stay bailed out, it means Greece will be in ‘constructive default’ as they will not have enough for a double digit billions “repayment” due in a few weeks… (A Wag would ask “is it really a repayment if you are borrowing the money to do it from the same folks?”… but maybe they are not exactly the same folks…)
Everyone is whistling past the graveyard that that the number will be enough to cover. There is a whisper that some percentage of the bond holders will suffer a “Cram Down”, where they change the terms of the loans and accept that, or lose everything in a bankruptcy proceeding. (That’s a polite way of saying the lenders are being blackmailed in the negotiations to either keep lending and keep Greece afloat, even if it’s a money loser, or lose even more in a default). Over $750 B participation, Laissez Le Bon Temps Roulet “Let the good times roll”… Under that number ‘enough’ and it’s OMG… (Various folks have different limits, $650 Billion being common) Why all these nice round numbers are not in Euro is an interesting question, but I’m mot going to explore that here.
I’m having trouble deciding which of these two scenarios is worse. Let Greece recognize that it’s in default. Let the bankers and other lenders take their wounds. Let the German Taxpayer off the hook for “more”, but losing more of what’s already been given. Destabilize European banks, but recognize they were fishy all along if bailing out Greece is the “best” option to avoid EuroBancruptcy…
In any case, a finding of constructive default on Greek Bonds (i.e. a sloppy Cramdown) will result in triggering of CDS Credit Default Swaps (or ‘insurance’ on the Greek bonds). That is likely to cause all sorts of financial grief. At the same time, loaning more than $750 B would likely cause a rise in gold (as folks run from yet more bailout inflation) and a drop in stocks (as folks take a ‘risk off’ posture). That’s per a gentleman named Lawrence McDonald, a Sr. VP from Newedge if I caught his intro correctly.
Or continue the fiction that everything is Just Fine, until the NEXT round of Greek Riots on “austerity” and “Soak The Germans to save French Banks” when they will be further in debt, have even less Tourist Dollars coming in, and be even less interested in “austerity”.
The traders on Fast Money include some very good and very bright folks. I’d not bet against them.
Gartman specializes in commodities most of the time. He is taking a position of “Long Gold, Short Oil” (and I can see that. While oil services and refiners are likely making money hand over fist off the oil / refined products spreads and non-US Drilling going gangbusters at over $100/bbl, oil itself has run up to near the usual ‘demand destruction’ point. Long run it will likely hit $120 $140 / bbl, but after the recent run it would be likely to ‘take a dip’ on bad economic news. Part of why in the WSW posting I suggested oil services and refiners, but not a ‘long oil commodity’, as likely to do well.) He’s expecting Euro instability to drive up gold.
Guy Adami “The Negotiator” long before Shatner… sees a ‘double bottom’ in SLW Silver Wheaton and is going long silver. (Via PAAS or as silver).
I’d been more generic in saying “precious metals” which includes Platinum and sometimes Palladium, but as they are used in catalysts as well, they sometimes move with expected economic growth and sometimes with political driven precious metals. So they are specifically staying away from the more “industrial special metal” (though silver is arguable becoming just that too).
Karen Finerman is generally a longer term investor and more cautious. She is buying TLT, so going long US Bonds. (Which tend to rise when there is risk or fear elsewhere in the world).
Again, a reminder, this is Fast Money TRADING, not slow money investing… So these folks are generally saying they expect some negative / destabilizing worry event, not honey and roses in the next week or two. (The typical kind of time scale they use, though occasionally they will run out to months on value trades; rarely to the 1 year horizon and then often just for Karen.)
A Note On Time Scales
Remember that “fixing your time scale” is critical here. What these folks are doing is placing bets about THIS News Event. Not making investments for a 6 month time horizon. I tend to look at a “couple of months” horizon for most trades ( i.e. I’m a trend trader, mostly, with occasional swing trades – picking a pivot point – based on longer trend reversals; and only rarely do event driven trades such as day trades or short time horizon swing trades).
So a comparison of “my expectations” vs “their expectations” may look like things are in conflict when they are not. We’re just looking at different time scales.
So I’ve said “Refiners and Oil Services look interesting”. That’s over a many months time scale. Similarly I expect oil to ‘hold up’ for a few years as economies pick up demand. None of that is in conflict with a Fast Money Trade timing. In fact, I watch Fast Money to help time my entries and exits.
How To Evaluate
I’m expecting a ‘dip’ in stocks to present a buying opportunity. Similarly I’m expecting “inputs” to industries to have growing demand over time as the global economy heals. Oil too. However, oil has already run up a bunch and that is typically followed by a “dip”. So saying I’m interested in oil and oils does not mean I think the time to own them is Right Now. It means it is time to WATCH them for a buying opportunity.
Some time ago I said ‘metals’. What Fast Money is saying is that the ‘time’ is about now. Just in the last day or two I’ve said “Hmmm… Oils…”, that means “watch now” as I have to give more ‘advance notice’ than a TV show with immediate viewers… What Fast Money is saying is “expect a dip in oil and stocks”. That is not in conflict; that’s the “Buy the dip” that I’m saying will be a good strategy longer term.
Overall the vision is the same. There is a Risk Pivot Point tomorrow. It will likely drive precious metals up (so you want them, and cash, now) and stocks and oil (the commodity) will likely drop for a short while, then recover. As soon as the “dip” has a deep high volume day, then stops going down, that’s your ‘buy point’. Usually about the same time, as the rotation from “risk off” to “risk on” happens, both US Bonds and Gold take a ‘dip’. So the major trade here is a “risk off” trade into US Bonds / Gold / Silver / Cash, then a “risk on” trade out of them and into oil, oil stocks, commodity metals, and general market stocks.
Of course, the whole thing could go dramatically some other way depending on what the ECB announces and what Germany and Greece agree to do. (That’s why I usually don’t do news event driven trades, it’s a sort of ‘double or nothing’). In those cases it is only really safe to ‘buy volatility’ via options. You buy options where the increased volatility event will raise the volatility premium… but that’s a very esoteric trade that most ‘plain folks’ are not prepared to do.
There you have it. Likely “risk off” event, then a rotation back into “risk on”, pivot on the news tomorrow, and if the news is contrary to a “risk off” event, everything will go ‘exactly backwards’ from the predictions here. (i.e. if it’s a “risk on” decision from the ECB, well, stocks will rise and cash / gold would not do so well…)